New Leave Encashment Rule: Non-Govt Employees To Gain Rs 20,000 Per Year, Says Revenue Secretary

Revenue secretary Sanjay Malhotra said those outside the government stand to gain at least Rs 20,000 annually due to the change in tax rules for leave encashment

The Union Budget announced several measures to offer relief to salaried individuals and the common man. Finance Minister (FM) Nirmala Sitharaman proposed to raise tax exemption on leave encashment on the retirement of non-government salaried employees to Rs 25 lakh from Rs 3 lakh. "In line with the increase in government salaries, I am proposing to increase this limit to Rs 25 lakh," the FM said.

Revenue Secretary Sanjay Malhotra in an interview with Times of India said the government has budgeted for two-thirds of the taxpayers to shift to the new tax regime and those outside the government stand to gain at least Rs 20,000 annually due to the change in tax rules for leave encashment. 

In an interview Revenue Secretary Sanjay Malhotra said, "The Rs 22 lakh benefit at 30 per cent plus works out to almost Rs 7 lakh." Malhotra said if one spread the exemptions for over 30-35 years, it works out to more than Rs 20,000 a year.

Malhotra said 50 per cent of personal income taxpayers are salaried class. Hence, the new leave encashment exemptions will benefit them at the time of retirement whether they choose the new tax regime now or the old today.

He said the new "leave encashment" exemption will also benefit government staff, including those working for AIIMS.

Leave encashment

Every salaried person is entitled to a minimum number of paid leaves every year, as per the labour law. However, an employee may not be able to avail all the leaves in a year. In such a situation, these unutilised paid leaves usually get carried forward to the next year. An employee ends up accumulating unutilised leave balance at the time of retirement or resignation. Hence, the employer is forced to compensate the unutilised paid leaves of employees which is referred to as leave encashment.

Is leave encashment taxable?

Leave encashment is taxable as per the law. If an employee receives leave encashment during his/her job, the amount forms part of 'income from salary'. However, an individual can claim some tax benefits under Section 89 of the I-T Act. One needs to fill out form 10E to claim tax relief for leave encashment.